As Luxembourg's funds industry experiences robust growth, Executive Director and Head of Depositary Services, Graham Dew examines the functionality of the Reserved Alternative Investment Fund (RAIF) vehicle and identifies why it is increasingly popular with alternative assets managers both in and outside of the EU.
After a multi-year recovery in equity markets, many investors are looking beyond traditional asset classes for returns in this low interest-rate environment. Alternatives such as private equity, infrastructure, real estate, specialist debt and renewable energy have offered attractive returns and in the decade up to 2017, global assets under management in the sector tripled to nearly nine trillion USD.
The rise in popularity of alternatives is especially notable in Luxembourg, where the private equity industry (PE) has experienced a 50 per cent increase in assets under management since 2018, increasing by 19 per cent year-on-year. With a robust financial services infrastructure, diverse fund products and sound regulatory framework, it has also become a jurisdiction of choice for American private equity managers interested in setting up private equity structures for European investors. North American private equity houses now represent 8 per cent of Luxembourg's total private equity holdings. A key reason for Luxembourg's emergence as a fund domicile of choice is the flexibility offered by the RAIF vehicle.
The Reserved Alternative Investment Fund
Introduced as an upgrade to Luxembourg's funds offering in July 2016, RAIFs provide a faster and more flexible alternative to Luxembourg's Specialised Investment Fund (SIF) and Investment Companies in Risk Capital (SICAR) structures. Unsurprisingly, the RAIF product has proven to be a popular choice and now represents 51 per cent of all Luxembourg PE funds. Reasons for its popularity include:
- Flexibility: Qualifying as an alternative investment fund (AIF), the RAIF product is able to invest in all asset classes and adhere to any kind of investment policy. A RAIF must be managed by an external Alternative Investment Fund Manager (AIFM), who can be domiciled in Luxembourg or in any other member state of the EU, meeting investor demands for onshore fund structures in the EU. Many of the common features of fund structures such as umbrella structures with sub-funds are also possible within the RAIF structure.
- Speed to market: Unlike the SIF and SICAR vehicles, the RAIF is not subject to dual regulation where both manager and fund are regulated and supervised by the CSSF. Therefore, a RAIF does not have to get clearance from the CSSF before launch which means it can be deployed to market relatively quickly. It must instead appoint an AIFM with a registered office in a European Union member state and is regulated to the Alternative Investment Fund Managers Directive (AIFMD), enabling it to take advantage of the AIFM's marketing passport to market across the EU.
- Passporting: A RAIF can benefit from passporting advantages of distribution because it is managed by an authorised AIFM. This allows for its shares to be distributed to professional investors across Europe.
- Investor protection: The flexibility of the RAIF enables it to switch to the SIF or SICAR regimes if additional investor protection is required at the fund level. Similarly, SIFs and SICARs can surrender their regulatory status to fall under the RAIF model.
Who are RAIFs for?
The decision to choose the RAIF vehicle depends upon who the fund manager is targeting as investors in its fund. However, RAIFs are specifically targetted at institutional investors, professional investors and those confirming in writing that they are a well-informed investor (investing a minimum of EUR 125,000 and have been assessed by a credit institution, investment firm or management company which certifies the investor's expertise). It is important to note that the appointment of certain service providers is mandatory for a RAIF:
- An AIFMD compliant depositary
- A Central Administration
- A Luxembourg external auditor
The increasing appeal of Luxembourg's funds landscape
With predictions that Luxembourg's private equity market will grow by at least 10 per cent per year until 2025 and with strong government commitment to the funds industry, the near future should represent a period of continued growth for its alternative investments industry, particularly as appetite grows outside of the EU and fund sizes continue to increase.
Fund services tailored to you
In order to establish RAIF structures efficiently and benefit from the structure's dynamic offering, asset managers require an experienced fund services partner to reduce administrative burdens, costs, and above all, the time-to-market of their RAIF.
Our funds team have extensive experience administering RAIFs and support you across the fund's life cycle so you can focus on adding value. From fund structuring and tax support, to accounting, audit support and depositary services, our team of award-winning real estate and private equity specialists - led by a blend of chartered surveyors, chartered accountants, lawyers and chartered secretaries - provide the support businesses need, how and where they need it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.